Greece vs. Iceland

Kipp owes Communicate, one of our publisher’s other titles, about AED 30 for lunch the other day. We were going to worry about it, but not anymore, because we just found out that Greece has a reported national debt in the order of $394 billion. That figure is bigger than the country’s entire economy, and some experts say it could reach 120 percent of GDP in 2010. As of two months ago, its budget deficit – how much more it spends than it earns – was still 12.7 percent.

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While it was the government going broke in Greece, in Iceland it was the trusty banks who dragged the country down. All three of the country’s banks discovered in 2008 that they were unable to refinance their debts, and when the scale of the problem was uncovered all three collapsed. Iceland was revealed to have external debts of $61.5 billion (at today’s exchange rate), 80 percent of which belonged to the banks. The problem? Iceland only has 300,000 inhabitants – it’s GDP is more like $10.5 billion. For sheer nonsense numbers relative to income, Iceland made the bigger mess.

When Kipp borrowed its lunch money, we were pretty confident we had the money to cover the repayment. But what an earth was Greece thinking when it allowed borrowing to reach such levels? The situation is the result of years of unrestrained spending, cheap lending and failure to instigate financial reforms. But these only came under scrutiny in the economic crisis, which also uncovered fiddled statistics that hid Greece’s true situation to allow it to join the European monetary union.

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As explained, for poor old Iceland, it was the banks wot dun it. The country’s three major banks were operating in international financial circles when they defaulted on all their debts. Iceland was forced to nationalize them as international investors fled and the currency plummeted. The banks had used the epic debt to finance foreign acquisitions that dwarfed the country’s GDP. When lending dried up, the banks collapsed, and the economy with it. Since it was the banks and not the government, we’ll spare Iceland’s blushes.

There’s running out of money, and then there’s running out of money, lying about it, trying to hide it, and getting caught, before dragging the entire economic world order to the brink of an abyss. Greece went for option number two, and suffered the comprehensive embarrassment you’d expect. At one point, responding to German criticism, the Greeks suggested that Germany could give them back the gold plundered by the Nazis in World War Two. The Germans suggested the Greeks should sell an island or two

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Maybe it’s because it was a while ago now, but the embarrassment factor for Iceland does not seem nearly so pronounced. After all, for all other countries concerned the debts were smaller in the scheme of things. Small, but not insignificant. The IMF provided a bailout, and many countries are demanding money back, but Iceland is not moved to acquiesce. President Olafur Grimsson vetoed a parliamentary bill which would have allowed Iceland eventually to repay £3.66billion owed to its British and Dutch government creditors. Not popular, but Iceland is certainly rediscovering its pride.

How did each country’s citizens react to their respective crisis? In Greece, understandably, there was much anger. Protests took place across the country, in particular over the stringent austerity measures imposed by the IMF and the European Union as the price for a bailout. Often gatherings got out of hand and in some cases descended into violence, property damage and even rioting. In one tragic incident, three bank workers were killed when a mob set fire to the bank branch in which they worked. Needless, horrific, and wrong.

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In Iceland, the response was calmer, but not always by much. Peaceful demonstrations took place outside the Althing (parliament) for some time, though they ultimately they did erupt into some violence. Months into the crisis the government collapsed. And when the time came, voters registered their anger by voting overwhelmingly to reject the plan to pay billions back to the UK and the Netherlands; a quiet protest at sufferings inflicted on them by events many believe were far outside their control.

We’ve already touched on this, but let’s take a closer look. Greece, as part of the euro (the entry to which it appears to have obtained by lying about its financial situation) undermined the whole credibility of the single European currency, and for a brief time the end of the entire project seemed totally plausible. The shockwaves of Greece’s problems sent world markets, already fragile, downwards, and the high cost of the bailout has been paid by countries coping with serious problems of their own.

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In European terms, the Iceland crisis was more of a sneeze than a cold. It took place in the early days of the economic slowdown, and at that point it wasn’t clear exactly how big the global challenges ahead would be. So yes there was anger from investors, saber-rattling and annoyance, but in truth, at the time, the global economy seemed to think it could handle it. Iceland was outside the euro, and the scale of the problem was small in a global sense. Whether the events contributed to the financial crisis as a whole is harder to qualify.

The Greek tourism industry was having a tough time of it, even before the debt crisis engulfed the country. As a popular destination for holiday makers across Europe, its tourism industry was hurt badly by the economic downturn. Those Europeans, concerned about their jobs and finances, chose to either stay at home or holiday closer to home. 2009 was the worst year for tourism for 15 years in Greece, according to reports. To encourage more trade prices have been dropped, but the recent high profile rioting and violence made it an even less popular destination.

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Iceland’s tourist industry is a long way off that of Greece. But that’s not to say it is non-existent. People travel from far away to see the bleak mountains and to enjoy the hot springs. The country is now choosing to make the most of a bad situation, it seems, by emphasizing the fact that prices in the country have plummeted (previously, the North Atlantic island had a reputation as one of the most expensive destinations). And a domestic campaign saw most of the country’s residents unite to spend an hour online, sending messages to friends across the world, inviting them to visit Iceland. Very clever.